Startup Boardroom, Day Four: The Accountant

Diane Kennedy, business author and certified professional accountant, Reno, NV.

A group of college buddies came up with a winning proposition for a microbrew beer company.  The beer tasted great, they had a great name and now all they needed was market share.  Plus, of course, a lot of starting capital.

They raised money from family and friends to get going. They ended up getting most of their money from pension plans belonging to their parents and aunts and uncles.
One of my clients invested.

Not long after, the guys ran into some unexpected expenses. But the beer was selling great in all the local markets, so they knew it was a success. Meanwhile, though, they needed to do a second round of financing.

My client asked my opinion. I asked, "Where are the financials? What do they show?"  We went back to ask the guys, who were unprepared to answer. They had no bookkeeping in place and no financial statements.

They found someone to help them out and a few weeks later came up with a financial statement.

The statement told the story.  It seemed that it was common in their industry to pay for shelf space for new beers. And the guys were giving bonuses to the drivers and sales people who could get their beer out there. They wanted to make sure they had the continual loyalty of all these people. Together, the cost of making the beer and the bonuses was more than the sales price of the beer.  They lost money on every single bottle of beer they sold. The faster it sold, the more money they lost.

And it wasn't a beginning marketing push.  They wrote contracts with the stores and sales people to pay out the bonuses forever. The payments kept going as long as the beer had space in the store.

I told my clients. They cut off funding. I told the owners. The guys said, "We'll make it up in volume."

They were out of business within six months.

The biggest mistake I see is not using your financial statements to gauge where you are, where you're going and to spot challenges and opportunities months in advance.  Yet many small business owners put off their bookkeeping, and financial statement prep. They treat it as the last thing they want to deal with.

Why do you think people ignore their financial statements? There's an easy answer -- it's not exciting to do bookkeeping.  Most people don't see a huge value, so they either plan to do it themselves or wait until they have to when they pull their tax information together.

What should folks be watching in those statements? Look at your gross profit margins. Where are you making money?  Where are you making more money, and where are you making less?  How are the stats trending? Up or down? What does your statement of cash flows show? Where does cash come from and where does it go? What are the key indicators for your business? What are the key leverage points?

A good set of financial statements, and an owner who understands how to read them, will produce better asset protection, smarter management of funds, and an ability to spot the low hanging fruit in the business -- that means quicker sales. Plainly, it helps with tax planning. But it also help businesses cut their losers quicker.


Diane Kennedy is a CPA, speaker and financial writer. She is the author of The Wall Street Journal and Business Week bestsellers, Loopholes of the Rich and Real Estate Loopholes. Diane's CPA practice, US TaxAid, is based in Reno, NV.